“A future Liberal government will create a cap-and-trade system that is both verifiable and binding, with hard caps that lead to absolute reductions. A Canadian cap-and-trade system must respect certain broad principles. It must:

be equitable to all regions;

emissions targets must not punish early-adopters who have already taken action to reduce emissions;

cover all industries with no exceptions;

be compatible with a U.S. cap-and-trade and other systems in the world; and

put a price on carbon by permitting credits to be auctioned and traded in international markets.”

The first question I have is where the hard cap is set. A hard cap sounds stringent, especially if you say it loudly and emphatically, but it really is all about the numbers. A hard cap of 1200 Mt per year (50% higher than Canada’s emissions today), starting in 2013, increasing at 4% per year would not do much at all…but it would be a hard cap. So, the first question the Liberals need to answer is What’s the Cap?

Let’s assume for the time being that the cap will allow us to meet the 17% below 2020 goal. Next question is who gets the permits? The Liberals tell us there will be an auction of (at least some of) the permits. How much would these permits be worth? The launching point for the LPC policy is the NRTEE’s report on Canada’s potential to harmonize its climate policy with that of the US, which shows how a carbon pricing policy could allow Canada to meet its 17% below 2020 goals, whether or not the US acts. To meet this goal, the NRTEE’s models suggest that we need a policy which prices carbon at about $75/ton by 2020, along with the purchase of about 20Mt worth of international permits. Let’s use their numbers. Assuming an industrial cap-and-trade coverage of about 75% of Canada’s emissions, this annual auction of permits could be worth about $34 billion dollars ($75/ton times about 465 Mt of industrial permits), or about 15% of the total federal government revenue today. That is a big pot of money. In fact, that is more than twice the annual revenue that was predicted to be collected through the Green Shift.

So, as with any new source of government revenue, the question becomes “Who gets the money?”. If we follow the NRTEE policy, a couple of billion a year will go offshore to buy permits. What about the other $30 odd billion? Tax cuts? Research and Development? Social Programs? Refunds to affected sectors? All we are told to date is that this will be redistributed in a way which is “equitable to all regions”. This is far too open ended. If the discussion around climate change at the UN has taught us anything, it’s that equitable means whatever works for me. So, LPC, who gets the money?

Now, don’t get me wrong; I think Canada needs a broad-based carbon pricing policy and I believe that now that we have signed on to the 17% below 2020 goal, we would give up a lot more by not meeting it than we would to meet it. My objection to this plan is that the party that set climate policy back 5 years in this country by allowing the re-definition of a carbon tax as a “tax on everything” may now do the same thing with cap-and-trade, unless they get out in front of questions like these and give people all the information they need up front. If they do that, and the system truly levels the carbon playing field, they might get my vote.

I think you raise a good question regarding what happens to the government revenue. In standard undergraduate economics courses, we work under the assumption of a “benevolent” government that makes good use of its resources… you’re right in suggesting that use of the term “equitable” is far too vague.

All in all though, I don’t fault the Liberals for adopting a “cap and trade” platform – in my opinion it is one of the less damaging ways of cutting our emission levels. But of course, before I throw in my full support, I’d need more straight answers…

Thanks for reading. It is certainly true that the standard treatment is to think of a government as benevolent, and so to treat government revenue as part of social surplus in the same way you would treat consumer or producer surplus. The underlying assumption here, as you correctly point out, is that the government will allocate that money effectively to enhance social welfare. As you get further into economics, depending on which area you look to, you will see different and more complex models of governments. Probably the next step is to think of a government as an agent that needs 50%+1 of the vote, and makes decisions to maintain the support of the “median voter”. Political economy models are not my specialty by any stretch, but they do get much more complex. Eventually, you look at the government as an agent in equilibrium, acting with an objective function which in most cases is something related to staying in power. This may or may not be closely aligned to the social good. So, this is where my concern with having a good definition of equitable comes from – the question of fairness in the eyes of which voters. I expect that if you polled voters east of Winnipeg, you would find strong support for the concept that it is fair to allocate emissions permits based on historic activity, so as not to penalize existing businesses. West of Winnipeg, and perhaps east of the Rockies, the concept of fair likely implies something closer to comparable constraints on growth, and that growing businesses should not be placed at a disadvantage. Understanding political forces West of the Rockies is above my pay grade. So, in short, you are right on about the early treatment of government revenue, but as with anything in economics, the deeper you dig the more realistic the models become.

I also don’t fault the Liberals for going the cap-and-trade route, but I would fault them if they did not learn the lessons of the past and let someone else define their policy for them. I believe that an emissions-price-based policy rather than a cap-and-trade approach makes more sense for Canada, but that’s another topic for another entry.

You seem to think there is some way of logically countering anti-carbon-tax slogans like “it’s a tax on everything!!!”.
There isn’t. People knew Harper was lying about the Liberal’s carbon tax. They voted for him anyway (albeit, minds were not made up exclusively on the carbon tax issue, but it had a large effect). The main complaint voiced in the press with “green shift” wasn’t that it wasn’t well explained, but that it was too complicated (in effect, creating too much cognitive dissonance with the global-warming denialism/skepticism given above-equal time in the press). The press claimed they wanted something simpler than a carbon tax.

The only way a sensible policy will be implemented is if a party refuses to campaign on it, because the media and voters themselves have proven beyond any doubt that they do not have enough self-discipline to avoid tempting lies.

By no means am I am political master, nor would I pretend to be. My sense, however, is that a policy you propose is best explained by you and not by your opponent. In the last campaign, I think Mr. Dion did a couple of things wrong with respect to the Green Shift. First, he tried to pitch the policy as a win for everyone – we will all “make megatons of money reducing megatons of emissions”. That simply was not true, as the policy was going to create winners and losers. Voters, I think, are skeptical of win-win-win policies, and so when the conservatives owned the narrative with “we will increase the tax” and the “tax on everything”, voters began to see themselves as the ones who would inevitably lose from the tax even where that was not likely to be true. I think the second error was that Mr Dion’s policy touched too many nerve centers: fed-prov issues over resources and the ghost of the NEP, a guarantee of higher taxes today in return for a promise of lower taxes tomorrow, and the issue you bring up about climate change denialism. Again, take all that with a grain of salt – that’s how it looked to me.

Now, on your last point, that has certainly not always been the case. Mulroney campaigned on the GST and on Free Trade and won. Chretien campaigned on the little red book and won. I think Dion had a decent policy, bad timing, and a really poor communications strategy and so could not sell it. He also centered his campaign on a policy that covered less than 10% of the budget, and devoted almost no attention to the other 90%.

A carbon tax is a bad policy. The price/ton needs to be high to even begin having an effect. Sweden is a perfect example of this. Despite the high price of $150/ton it has only resulted–by the Swedish government’s calculations–of a 2% decrease in CO2 emissions.

Thanks for your comments, Robert. The case of Sweden is an interesting one because they do have a nominally high carbon tax rate. but it is not as broadly applied as it might be (i.e. it doesn’t apply to fuel used for electricity generation). That said, Sweden’s emissions are down about 9% since 1990, while their economy has grown 44%. I read your blahg piece on it, and I don’t agree with your contention that reductions relative to business-as-usual are not an important metric. That is really the measure that tells us how much the tax has changed behaviour, as compared to reductions relative to 1990 or some other baseline year, which could confound effects not at all related to the policy (collapse of communism in Eastern Europe, for example). That said, I would not dare argue with your contention that carbon taxes are bad policies – they simply can’t be grouped as one item. As you correctly point out in your blahg, the Green Shift would have been a different policy on many dimensions (stringency, coverage, and the underlying covered economy) from Sweden, and so to look at results from a “carbon tax” in Sweden and to assume that any carbon tax at any level in any country would have comparable results would be foolish.

As to what is perhaps the crux of your argument, the question of whether emissions prices alter behaviour, I simply can’t rationalize that they would not. Now, as I see it, there are four reasons why a carbon charge would not change behaviour (as compared to the world without that charge). First, if the carbon charge is simply a re-labeling of an existing tax and so has minimal impact on relative price levels, we should not expect any big changes. Second, if the carbon charge covers only certain sectors, we should not expect changes across the board. Next, if the carbon charge is set at a small level, we should not expect big changes (i.e. BC or QC). The fourth, and I think most common perception, is that people will just “pay the tax” and go on with life. That will certainly be true for some people (that’s the point) as they will value the consumption of the polluting good at a rate greater than the charged tax, but not for others. If the food in your favourite restaurant suddenly is much more expensive, you will likely look elsewhere. Similarly for carbon charges.
So, I don’t think a “carbon tax” is a catch-all, miracle solution, but I don’t think you can dismiss it out of hand as bad policy. You can certainly have poorly designed carbon taxes, and poorly designed carbon policies of all stripes, but that doesn’t mean the tool is a bad one. For the record though, I am much more a fan of the Swedish industrial NOx policy than their carbon tax.